India’s new closing auction system, introduced in August to enhance price discovery, encounters initial turbulence amid calls for a slowdown, yet SEBI insists the overhaul will proceed despite early disruptions.
India’s newest stock market reform has stumbled through its opening days, but the country’s markets regulator is insisting the experiment will not be abandoned. Senior officials at the Securities and Exchange Board of India, including board member K.V.R. Murty, have told market participants that the early turbulence reflects teething problems rather than a design flaw, according to people familiar with the discussions. After brokerages pressed for a rollback, SEBI’s message was blunt: the closing auction is staying.
The system, which was rolled out in phases from August 3 for shares with listed derivatives, replaces the old volume-weighted average price method with a 20-minute auction from 3:15 p.m. to 3:35 p.m. local time. SEBI says the change is meant to improve price discovery, produce more reliable closing levels and bring India closer to global market practice. It was first proposed in 2024, after large index funds argued that a closing auction would help reduce tracking error.
But the first week exposed how dependent the mechanism is on broad participation. On the first two trading sessions, including Tuesday’s derivatives expiry on the National Stock Exchange of India, the new process produced sharp moves that confused traders, brokerages and retail investors alike. On Monday and Tuesday, the auction lifted the Nifty 50’s official close above the level seen when continuous trading ended at 3:15 p.m., before that gap narrowed as more firms adapted. Goldman Sachs said thin liquidity meant even relatively small orders could shift the closing price more than traders were used to seeing.
Several market participants say the problem is not the concept but the pace of the transition. Mayank Sachan, chief executive of Zenskar Research, told Bloomberg that allowing more time for liquidity to build might have made the switch smoother. Bhautik Ambani, chief executive of AlphaGrep Mutual Fund, said every developed market uses a closing auction and that India had arrived before the liquidity was ready. SEBI, in meetings with major brokerages this week, urged firms to upgrade their systems and bring more orders into the auction. A spokesperson for the regulator did not respond to a request for comment.
The disruption has also raised questions about trading revenues, especially for firms active in expiry-day options. Zerodha Broking estimates the reform could shave 1% to 5% off industry revenue, while Jefferies has warned that a fall in expiry-day contracts could feed through into a broader drop in options volumes. The issue matters for the National Stock Exchange as well, since derivatives contribute a large share of its income. For now, though, the regulator appears determined to let the new framework settle rather than retreat from one of the most significant market structure changes India has made in years.
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